Blockchain-Enabled Trade Finance Innovation: A Potential Paradigm Shift on Using Letter of Credit - MDPI
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sustainability
Article
Blockchain-Enabled Trade Finance Innovation:
A Potential Paradigm Shift on Using Letter of Credit
Shuchih Ernest Chang, Hueimin Louis Luo and YiChian Chen *
Graduate Institute of Technology Management, National Chung Hsing University, Taichung 40227, Taiwan;
eschang@dragon.nchu.edu.tw (S.E.C.); louisluo7755@gmail.com (H.L.L.)
* Correspondence: cycx1000@gmail.com
Received: 29 November 2019; Accepted: 23 December 2019; Published: 25 December 2019
Abstract: This paper explores a potential paradigm shift in trade finance utilizing blockchain
technology. Traditionally, the centralized operating model has governed trade finance and the
manner in which traders handle business processes. However, such heavy reliance on centralized
authorities has made for poor performance, the lack of flexibility and transparency, and vulnerability
to malicious alteration. The blockchain, as a distributed ledger technology (DLT), has attracted
growing attention and has the potential to disrupt legacy finance procedures such as payment by
letter of credit (L/C). International trade players may benefit from the technological reengineering of
financial processes through the implementation of blockchain- and smart contract-based platforms.
From the conceptual perspective of a paradigm shift, this study analyzes the feasibility of blockchain
innovation in trade finance through modern blockchain-based L/C initiatives. Moreover, this study
also explores blockchain applications in terms of logistics tracking and how it integrates with trade
finance procedures. This study contributes to the understanding of a blockchain paradigm shift
with a multi-case study. The results may illuminate the potential future application of blockchain
finance and provide researchers with an illustrative example of other finance-related capabilities.
Studies of trade-related topics such as customs clearances, insurance, and logistics applications need
to be addressed in the future to create a comprehensively trustless environment and facilitate the
automation of trade.
Keywords: blockchain; trade finance; letter of credit (L/C); smart contract; distributed ledger
technology (DLT); paradigm shift
1. Introduction
The advent of blockchain technology has drawn increasing attention of academia and practitioners
alike. Recent topics focus on discussions of how the blockchain may help business operations
and the role it plays in various contextual sectors [1]. One such topic of interest is trade finance,
particularly international trade involving different types of trading parties. Trade finance relies
heavily on paper-based business operations involving information transmission, asset transfers, goods
handovers, and payment processes. Traditionally, business parties build trust with a centralized
operating mechanism, such as payment by letter of credit (L/C) [2]. However, low efficiency and
vulnerabilities to malicious alterations have hindered overall performance. Decentralization of
operating business networks may help to improve issues such as transparency, real-time tracking,
and trustless transactions among players. Researchers have stressed the importance of ensuring
sustainable business environments by means of sustainable finance, corporate social responsibility,
and performance [3]. Efforts on building trust among trade stakeholders, thus, eliminating friction
because of information transmission/confirmation through emerging technologies, are of the utmost
significance in terms of achieving environmental sustainability in the corporate milieu.
Sustainability 2020, 12, 188; doi:10.3390/su12010188 www.mdpi.com/journal/sustainability
Sustainability 2020, 12, 188 2 of 16
The increase in technology-based risks, such as cyber-attacks and malicious hacking, has
jeopardized business operations and finance practices [4], prompting the development of alternative
solutions for establishing more secure and sustainable business finance by developing new and
innovative working paradigms. The blockchain, serving as a shared ledger (database), may facilitate
trade finance by means of its distributed network, which maintains transparent records of critical
transactions among trading stakeholders [5]. The blockchain could potentially enhance transaction
transparency and supply chain traceability [6–8]. In addition, its affiliated technology, the smart
contract, may be deployed in the blockchain environment to execute event-based contract terms or
agreements [9]. This paper aims at providing evidence of the potential for the blockchain to improve
traditional L/C payments and traceability, by analyzing extant literature and contemporary initiatives.
Using the concept of paradigm shift, this multi-case comparison study attempts to answer the research
question: How may the blockchain help trade finance from the perspective of L/C payment projects,
such that it contributes to a better understanding of blockchain innovation in trade finance besides
illuminating the impact of such distributed network paradigms?
This study contributes to the literature and practice in three ways. First, we investigate emerging
trade cases that allowed an understanding of the potential of blockchain technology in trade finance.
As blockchain and smart contracts are considered promising with unique characteristics, such as
immutability, accountability, and automatic attributes, they are particularly valuable in reforming
business processes in complex trade finance scenario. Second, this paper illustrates how blockchain and
related smart contract technology may facilitate business processes. This paper explores blockchain’s
roles in streamlining supply chain activities and the value it might provide in terms of process re-design.
Third, we provide an overview of cases that examined blockchain-based applications in trading
activities. From these pilot initiatives, the feasibility and potential value in pursuing a sustainable
supply chain can be further elucidated. This study will help researchers and practitioners gain insight
into blockchain applications in trade-related financial processes.
This paper is structured as follows. Section 2 reviews related work. Section 3 describes research
method and introduces cases. Section 4 elaborates research findings and builds link to paradigm shift.
Section 5 presents a comparative discussion before making concluding remarks in Section 6.
2. Background
2.1. Trade Finance with Letters of Credit
Trade finance has played a crucial role in international trade. According to diverse levels of risk,
traders may choose different payment terms to satisfy various strategic concerns. Generally, L/C (also
known as documentary credit) stands for a documentary proof of trust and is the payment modality
preferred by exporters because of its lower risk level. Payment is made once terms or conditions are
met. Traditionally, L/C involves various types of business activities and suffers from issues such as
tedious document processing, higher issuance cost, and forgery/counterfeiting.
Figure 1 shows a typical illustration of an L/C process in an international trade transaction.
Normally, the typical trade participants are sellers (exporters), buyers (importers), shippers (logistics
carriers), and the banks that manage credit operations. Trade activities consist of three major flows:
document, cash, and logistics flows. In general, international trade starts with the establishment
of a sale contract between a seller and a buyer. To reduce potential risks between trading parties,
certain kinds of payment methods, such as payment by delivery, telegraphic transfer, open account,
and L/C, are introduced and adopted in various contexts to mitigate potential trading uncertainties.
Among these, the L/C method is considered to be a highly secure payment modality with respect to
trade financing. Banks in the countries of the seller and buyer function as dominant intermediaries
facilitating the transaction, namely, the exchange of cash and physical goods. The buyer asks their bank
to issue an L/C to the seller’s bank, which advises the seller to check the received L/C for the exchange
of goods. The seller arranges shipment to the buyer, while the shipper provides shipping documents,
Sustainability 2020, 12, 188 3 of 16
Sustainability 2020, 12, x FOR PEER REVIEW 17
such as a bill of lading (B/L), to the seller. The B/L is considered to be a physical warranty to claim
documents,
ownership such
of the as a and
goods bill of
is,lading (B/L),
in turn, to the seller.
forwarded The
to the B/L is considered
seller’s to be a sent
bank and finally physical warranty
to the buyer’s
to claim ownership of the goods and is, in turn, forwarded to the seller’s bank and
bank, after which payment is made to the seller’s bank. Finally, the buyer pays their bank in exchangefinally sent to the
buyer’s bank, after which payment is made to the seller’s bank. Finally, the buyer pays their bank in
for the B/L, which they present to the shipper to claim the goods when delivered. The traditional L/C,
exchange for the B/L, which they present to the shipper to claim the goods when delivered. The
as a kind of documentary credit, is comparatively secure to other payment methods, but processing it
traditional L/C, as a kind of documentary credit, is comparatively secure to other payment methods,
is complex and time-consuming. Multiple participants doing cross-border business with unfamiliar
but processing it is complex and time-consuming. Multiple participants doing cross-border business
counterparties may cause communication and coordination difficulties that result in high costs and
with unfamiliar counterparties may cause communication and coordination difficulties that result in
poorhigh
usercosts
experiences [10]. The difficulty of document and information transmission has jeopardized
and poor user experiences [10]. The difficulty of document and information transmission
the widespread adoption of L/C [11,12].
has jeopardized the widespread adoption of L/C [11,12].
Figure
Figure 1. A
1. A typical
typical letterofofcredit
letter credit(L/C)
(L/C)payment
paymentprocess.
process.
2.2. 2.2.
The The
Blockchain andand
Blockchain Smart Contracts
Smart Contracts
TheThe blockchain
blockchain functionsas asa adistributed
functions distributeddatabase
database by by creating
creating time-stamped
time-stamped blocks
blocks via
via
cryptography.
cryptography. It isItthe
is the underpinning
underpinning technologyofofBitcoin
technology Bitcoinand andenables
enables the
the bookkeeping
bookkeeping of ofdigital
digital
transactions
transactions on blocks
on blocks [13].
[13]. With
With unique
unique consensusmechanisms,
consensus mechanisms, such such as
as proof
proof of
of work
work (POW),
(POW),the the
blockchain may provide better transparency, immutability, and auditability because of its intrinsic
blockchain may provide better transparency, immutability, and auditability because of its intrinsic
distributed
distributed network
network andand consensus
consensus mechanism
mechanism qualities[14].
qualities [14].The
Theblockchain
blockchain permanently
permanentlymaintains
maintains
transaction records in blocks, and thus, it enhances the transparency
transaction records in blocks, and thus, it enhances the transparency and security andlevel
security level of
of transactions.
transactions. With such features, the blockchain has drawn attention of researchers who argue that
With such features, the blockchain has drawn attention of researchers who argue that the innovative
the innovative application of the blockchain may transform supply chain management [8,15] as well
application of the blockchain may transform supply chain management [8,15] as well as the insurance
as the insurance and finance industries [16–18]. Guo and Liang [19] argued that the blockchain may
and finance industries [16–18]. Guo and Liang [19] argued that the blockchain may revolutionize
revolutionize traditional banking operations, along with payment systems, by formulating a
traditional banking operations, along with payment systems, by formulating a multicenter and
multicenter and less-intermediated paradigm while blockchain potential in logistics may solve
less-intermediated paradigm while blockchain potential in logistics may solve logistics-related
logistics-related issues [20]. Our study examines complex trade finance processes and attempts to
issues [20]. Our study examines
reengineer the L/C process complex
as an example trade
of a finance
potentialprocesses and attempts
revolutionary, to reengineer
paradigm-shifting the L/C
blockchain
process as an example of a potential revolutionary, paradigm-shifting blockchain application.
application.Sustainability 2020, 12, 188 4 of 16
The smart contract refers to a series of digital agreements, including terms and conditions promised
by contract participants [9]. With its programmable protocol, the smart contract allows the execution
and automation of contract terms. Smart contracts may be deployed on the blockchain platform
and applied to activate code execution through event triggers for various applications in a business
context [21] in that business activities among global trade participants may be considered to be a
suitable use of the smart contract. When compared with the heavy use of paper contracts and trade
documents in global trade, a smart contract deployed on the blockchain provides a seamless solution
that may prevent tampering and counterfeiting. Traditional L/C processes rely heavily on centralized
business operations, whereas the integration of the smart contract and the blockchain into trade
processes mitigates issues such as counterfeiting and malicious alteration [10].
The blockchain, combined with the deployment of smart contracts, provides a more secure,
transparent, auditable, and automatic transactional environment for trade stakeholders. The underlying
event-driven mechanism facilitates smart contract interactions. State changes in trading activities
and updated logistics/payment statuses are considered to be one-of-a-kind events on the blockchain.
Smart contracts may be programmed according to the terms of contractual agreements, and payments
may be triggered by predetermined events. Blockchain-based smart contract applications have
the potential to transform traditional business operations by enabling the deployment of various
customized applications across different industries.
2.3. The Concept of Paradigm Shift
The term “paradigm shift,” coined by Thomas Kuhn in 1962, refers to a radical change or a
revolution in a scientific discipline in terms of personal beliefs, basic concepts, thought patterns, and
technological or social system practices [22,23]. From the traditional practice of intermediary finance
to a more transparent and automatic payment process, the blockchain network may alleviate the need
for transaction verification that is currently provided by centralized authorities in brick-and-mortar
banking operations. A paradigm shift from a centralized process (the current banking practice) to a
distributed collaborative network (the blockchain) may enable the facilitation of process automation
and the practice of value transfer via a centralized, transparent ecosystem.
Trade finance has long been subjected to a poor level of efficiency, heavy manual processing,
and lengthy delivery of trade-related documents, such as the presentation of B/L in exchange for the
ownership of goods. Handovers via shipping increase uncertainty and decrease real-time traceability.
Traditional trade finance via L/C relies heavily on the trust mechanism accumulated by intermediaries
(e.g., banks). A blockchain innovation may be to reengineer business processes and offer a better value
proposition in terms of validity, auditability, and disintermediation [24] in trade processes.
In modern business processes, a blockchain-enabled L/C might provide better document
digitization because of its immutable functionality. When compared with traditional paper-intensive
processing, the blockchain may have the potential to present an innovative value from the perspective
of cost and time reduction in financial processes. Smart contracts deployed on the blockchain could
automatically execute business logic transactions and reduce the involvement of human intervention in
order to avoid unnecessary error and intentional, malicious manipulation. The consensus mechanism
underpinning blockchain technology may enable distributed networks to achieve less intermediation
and improve how trade counterparties interact with each other. In this sense, more streamlined, secure,
and transparent financial transactions could enhance the overall efficiency of trade.
3. Materials and Methods
In the present study, recent projects were explored to demonstrate that blockchain L/Cs are
a potential tool for improving incumbent trade finance processes. Our hypothesis stems from a
multiple-case study, which is believed to provide better insights than a single-case study [25–27].
Prior researchers have devoted similar efforts in exploring the role of the blockchain in achieving
critical supply chain objectives such as cost, speed, dependability, sustainability, etc. [6]. By adoptingSustainability 2020, 12, 188 5 of 16
multi-case studies, nascent pilot materials deriving from webpages, news, and company reports are
accessed to provide general overviews. Similar efforts could be referenced in blockchain applications
in the marine industry [28]. However, little research effort has specifically focused on an analysis of
the use of L/C in assisting trade finance, particularly from the perspective of promoting a paradigm
shift. This article also seeks to provide proof for a potential shift in trade finance paradigms by using
empirical evidence drawn from multiple cases. In doing so, we aggregated different scenarios of the
blockchain application of trade-related procedures that deal with L/Cs and B/Ls.
Thomas [29] considered the case study to be a systematic analysis of a specific target from a wide
perspective in order to better understand it, whereas the case study may not only be limited to the
analysis itself but also enable better comprehension through the process of exploration. Case study
results may elucidate the understanding of competitive strategies and operational business schemes,
the development of theories, and the evaluation of system performance [30]. Therefore, the objective
of a case study may be to analyze people, businesses, events, systems, countries, or any other specific
unit, with an extensive overview or detailed investigation. Cases of interest may be studied singly
or jointly for the pursuit of generalization. Therefore, researchers categorize case studies into two
major types: single and multiple. For example, Creswell [31] defined and classified the method of the
case study as an exploration of “contemporary bounded system (a case) or multiple bounded systems
(cases) over time, through detailed, in-depth data collection involving multiple sources of information
. . . and reports a case description and case themes.”
While case studies, from a qualitative perspective, help with the comprehension of selected
targets, in making the choice of using a single- or multiple-case study, one needs to consider research
objectives, contexts, expenses, and representativeness [27,32]. Multi-case studies enable researchers to
discuss data within and across different situations [27]. In this sense, a multiple-case study allows
a comparative understanding across the evolution of specific phenomena even though it might be
time-consuming, expensive, or more complex to do so during its implementation. By comparing
various cases, researchers are more likely to extract common characteristics, give explanations, and
develop more reliable theories from the underlying evidence. This study utilizes a multiple-case study
methodology along with comparative analysis to acquire insight into the similarities and differences
among blockchain-based L/C projects. The additional benefit of choosing the multiple-case study
methodology lies in its capability to explain the potential paradigm shift in L/C processes. The proven
evidence resulting from the selected cases may also provide the literature with extended scope and
identify the importance of blockchain-related trade finance solutions.
3.1. General Principles for Case Selection
To better capture diversity and representativeness, Seawright and Gerring [33] suggested that the
selection of cases should cover the general population and take extreme cases along with diverse cases
into consideration to further increase the scope of the cases’ analyses. For extreme case consideration,
we focused on representative pioneers of pilot projects, that is, early adopters of blockchain-enabled
L/C. Moreover, to extend the diversity of cases among existing blockchain finance projects, we also
included highly related cases dealing with B/Ls. The researchers used various sources, including news
archives, consulting reports, academic articles, and company websites, all of which contributed to the
selection and description of target cases. For all cases selected, sufficient information from secondary
resources was required for the performance of the subsequent case analysis.
Table 1 reports existing pain points among global trade procedures and business processes.
In addition, it also presents the potential advantages of using blockchain-based solutions and indicates
where such technology may penetrate for resolving related issues. Based on Table 1, this study selected
modern pioneers as observational targets and investigated how these capabilities may have helped
trade finance. Emerging trial projects using blockchain platforms, such as Ethereum and Hyperledger,
have been announced and have drawn increasing attention of enterprises [34–37]. We selected cases
exhibiting at least two or more of the reported issues listed in Table 1. Such criteria ensured the qualitySustainability 2020, 12, 188 6 of 16
and functionality of the selected cases. This study also used archive-based data and related secondary
resources, such as trial project websites, consulting reports, news reports, and review comments.
For instance, the Maersk case was selected because of its consideration of accessible information
richness, representativeness in global trade roles, and capability to affect followers [38]. In addition,
we traced the development of the selected project not only by visiting the related company’s websites
but also by gathering information from relevant reports by the press or other parties. This was done to
avoid information bias and to enhance the objectivity of case selection [39].
Table 1. Global trade pain points and potentials via using blockchain L/C.
Issues Global Trade Pain points Potentials utilizing blockchain L/C
Heavily relying on an authorized central party Use of immutable, consensus-based, and
Trust Mechanism (e.g., banks) as intermediary to cope with distributed ledger network to build up trustful
trade finance. trade environment
Malicious attempts which may cause fraud, Keeping contract terms on blocks and
Fraud and alterations, later trade disputes; permanently recording alterations of contract
authenticity Authorities involved in building up trust among terms on a chain;
trade parties. Mitigating the tampering issue.
Paper-based and manual processing; Digitized documents deployed on a secured and
Document type
Lengthy delivery. distributed shared ledger.
Risk-sensitive; Risk mitigation. Trust ensured through the use of
Transactions
Relying on authorized third parties. consensus mechanisms.
Digitized operation;
Intensive paperwork for presentation.
Bill(s) of lading Reduced time of transfer and delivery,
Lengthy delivery across borders;
(B/Ls) Blockchain-based identification without
Complex ownership transfer across handovers.
presentation of B/Ls.
Manual processing which takes the expense of Event-driven mechanism with smart contract
Information time and cost; settings. Consensus mechanism with
transmission Centralized data manipulations which may suffer tamper-proof features. Less security and privacy
from cyber-attacks or system malfunction. concerns on consortium chain
Complex trade processes due to
A member database which can be searched for an
multiple participants;
Traceability examination of credit ratings, thus resulting in
Uncertainties caused by handovers in tracking
better user experience.
asset identities, ownership, and shipment status.
3.2. Selected Cases
3.2.1. Case A: Ornua’s L/C (Wave)
Barclays announced its cooperation with an innovative start-up, Wave, a decentralized blockchain
hybrid crypto asset exchange platform, and initiated the supposed first global trade with its
blockchain-based L/C project on 6 September 2016 [40]. This illustrative case shows how the
blockchain can allow the restoration of trust in trade. Target goods, namely, cheese and butter, were
transacted between Irish agricultural food cooperatives Ornua (formerly the Irish Dairy Board) and the
Seychelles Trading Company [41]. Ornua has suffered from expensive export coverage across countries,
particularly for the time-intensive, complex, and lengthy processing of L/C issuance and approval.
Barclays reported a great reduction in trade finance processing time (particularly, it was completed
within four hours). The operation of a blockchain-based L/C system averts paper-heavy transmission,
and traders can, therefore, benefit from the adoption of the blockchain. Overall performance was
enhanced with the employment of a more streamlined cross-border transaction.
The blockchain platform, Wave, utilizes the blockchain as a shared ledger to store trading
documents (i.e., B/Ls). Participating parties, including banks and trading counterparties, are able to
access on-chain data to track the flow of information and goods. In addition, Wave uses smart contracts
deployed on the blockchain to log the transfer of ownership. Smart contracts, in this sense, may facilitate
payment processes upon preset terms, such as upon the arrival of goods to port. The presentation
of a B/L triggers the execution of an ownership transfer. Traditional financial procedures related to
document collection, approval, and presentation are incorporated with the integration of the blockchainThe blockchain platform, Wave, utilizes the blockchain as a shared ledger to store trading
documents (i.e., B/Ls). Participating parties, including banks and trading counterparties, are able to
access on-chain data to track the flow of information and goods. In addition, Wave uses smart
contracts deployed on the blockchain to log the transfer of ownership. Smart contracts, in this sense,
may facilitate
Sustainability 2020,payment
12, 188 processes upon preset terms, such as upon the arrival of goods to port.7 of The
16
presentation of a B/L triggers the execution of an ownership transfer. Traditional financial procedures
related to document collection, approval, and presentation are incorporated with the integration of
and smart contracts.
the blockchain The underlying
and smart contracts. working scheme working
The underlying proves the feasibility
scheme of athe
proves distributed ledger
feasibility of a
system in such a trade process.
distributed ledger system in such a trade process.
3.2.2. Case B: Mizuho and Marubeni (Hyperledger)
3.2.2. Case B: Mizuho and Marubeni (Hyperledger)
On 6 July 2017, by using blockchain technology the Japanese company Marubeni and Sompo
On 6 July 2017, by using blockchain technology the Japanese company Marubeni and Sompo (an
(an insurance company) demonstrated the manner in which the application of DLT replaces the use
insurance company) demonstrated the manner in which the application of DLT replaces the use of
of L/Cs and other trade-related documents. The trade deal was conducted using IBM’s Hyperledger
L/Cs and other trade-related documents. The trade deal was conducted using IBM’s Hyperledger
Fabric platform, which reduced the transaction duration from weeks to approximately two hours.
Fabric platform, which reduced the transaction duration from weeks to approximately two hours.
Figure 2 illustrates the workflow of this L/C transaction.
Figure 2 illustrates the workflow of this L/C transaction.
Figure 2. A
A conceptual
conceptual overview of the L/C process, as conducted by Marubeni Corporation.
To
To aagreat
greatextent,
extent,a hyperledger
a hyperledger platform enables
platform a great
enables reduction
a great in the in
reduction usethe
of traditional trading
use of traditional
and shipping
trading documentation,
and shipping via the use
documentation, via of
theDLT. From
use of DLT. sales
Fromcontract establishment,
sales contract request request
establishment, for L/C
issuance, and handover of documents (L/C and B/L), to final payment and fund
for L/C issuance, and handover of documents (L/C and B/L), to final payment and fund settlement, settlement, the banks
of
thethe exporter
banks of theand the importer
exporter and thecompleted a trial transaction
importer completed over the blockchain
a trial transaction network. However,
over the blockchain network.
to achieve to
However, a critical
achievemass of blockchain
a critical adoption in
mass of blockchain the trade
adoption in industry,
the trade technical
industry, issues on issues
technical common on
protocols
common and collaborative
protocols willingness from
and collaborative users will
willingness be influential
from users will in its
be future development
influential [42].
in its future
The blockchain
development [42]. and DLT may enable speedy, risk-free, and fraud-proof transactions between
unfamiliar parties. Paperless
The blockchain and DLTdocumentation
may enable speedy,flows, risk-free,
along with auditable
and monitoring
fraud-proof schemes,
transactions have
between
attracted
unfamiliar many followers.
parties. The high
Paperless cost of administrative
documentation flows, along procedures and themonitoring
with auditable high volumeschemes,
of paperwork
have
is greatly reduced,
attracted while issues
many followers. Thesuch as the
high lack
cost ofofadministrative
wider adoptionprocedures
among trading andparties and information
the high volume of
standardization
paperwork is greatlyat thereduced,
international
whilelevel aresuch
issues yet to
asbetheresolved [43]. With
lack of wider an event-driven
adoption among trading mechanism
parties
(EventBridge
and information in Hyperledger),
standardization multiple participants receive
at the international level aremessage notifications
yet to be resolved [43].fromWith
preregistered
an event-
smart
drivencontracts.
mechanism The functionalityinofHyperledger),
(EventBridge the blockchain serves as
multiple a business-to-business
participants receive message (B2B) messaging
notifications
layer
from while business interactions
preregistered are designed
smart contracts. accordinglyof
The functionality to the
reactblockchain
to triggeredserves
events,asfora example, the
business-to-
arrival
business or (B2B)
delivery of goods layer
messaging triggers a payment
while business request [44]. are designed accordingly to react to
interactions
triggered events, for example, the arrival or delivery of goods triggers a payment request [44].
3.2.3. Case C: Maersk and IBM (Hyperledger Fabric)
3.2.3.In
Case C: Maersk
September and
2016, IBM (Hyperledger
Maersk, Fabric)shipping corporation, initiated a tracking project
a leading container
with IBM for flower shipments from Kenya to the Netherlands. Participating parties included
shippers, freight forwarders, customs authorities, and traders. This solution was targeted to improve
logistics monitoring and shipment traceability. Likewise, the critical issue to be resolved was the
significant volume of paperwork for related containers. Maersk and IBM collaboratively worked on
the digitization of documentation and formulated a visible shipment framework for each shipping
participant. Document-related signatures were digitized with cryptography techniques to preventSustainability 2020, 12, 188 8 of 16
malicious counterfeiting. Hyperledger Fabric functioned as the common shared ledger, which was
collaboratively maintained by the participating parties. With regard to this, an auditable, immutable
ledger was formulated and could be used to reduce physical processes and paperwork in such
cross-border trades [45].
Numerous communications on settling administrative procedures have often caused disputes
and latency of shipments. A high incidence of fraud and the onerous costs of managing paper
documentation may be averted, or greatly reduced, by the adoption of blockchain-based shared ledgers.
Maersk reported that an estimated one-fifth of the cost was saved in terms of the actual physical
transportation of goods. This project provided shipping visibility on the basis of participants’ levels
of permission [46]. Customs clearance documents and B/Ls can be viewed and tracked to enhance
overall transparency and process information reliably. In addition, Maersk also devoted efforts to the
simplification of the L/C, which increased willingness to adopt blockchain ecosystem participation [47].
Future solutions that combine the blockchain and the Internet of Things (IoTs) are the next focus, and
research efforts to improve the performance of blockchain trading systems are encouraged.
3.2.4. Case D: HSBC Trade Transaction with Cargill via Voltron (Corda Blockchain)
In 2018, HSBC announced its first blockchain-based trade for the U.S.-based food and agricultural
group, Cargill, via blockchain L/C. The case adopted a consortium chain to provide soybean shipment
solutions and facilitated transactions between HSBC and the R3 counterparty, the Dutch bank ING.
From Argentina to Malaysia, this project utilized an R3 Corda blockchain to realize food traceability [48].
This pilot project inherently took advantage of blockchain features to simplify manual processing
and paperwork when dealing with L/Cs. Traditional lengthy exchanges of export documentation
were largely reduced with an associated reduction in costs. Figure 3 shows the process flow (in
terms of a sequence diagram, SD) along the trade finance life cycle. ING and HSBC are acting as
intermediary banks to bridge the transaction between Tricon Energy (buyer) and Reliance Industries
(seller). Both banks are Voltron L/C consortia members using R3’s Corda technology.
Sustainability 2020, 12, x FOR PEER REVIEW 17
Figure
Figure 3.
3. Flows
Flows between
between nodes
nodes along
along the
the trade
trade finance
finance life
life cycle
cycle on Corda.
on Corda.
Corda is an open-source blockchain platform for business scenarios. Corda differs slightly from
a traditional blockchain platform because of its capability to minimize information leakage (by only
dealing with crucial transactional data) and its compatibility with legacy infrastructure (which
achieves better interoperability). It is designed for permissioned groups of participants and enables
easy management of legal contracts and shared data between trusted parties. Corda averts
unnecessary data sharing in the consortium contextual network and allows access control by
dominant parties (usually referring to banks).Sustainability 2020, 12, 188 9 of 16
dealing with crucial transactional data) and its compatibility with legacy infrastructure (which achieves
better interoperability). It is designed for permissioned groups of participants and enables easy
management of legal contracts and shared data between trusted parties. Corda averts unnecessary
data sharing in the consortium contextual network and allows access control by dominant parties
(usually referring to banks).
3.2.5. Case E: BBVA B/L (Ethereum Blockchain, Wave)
In 2018, Banco Bilbao Vizcaya Argentaria (BBVA), a Spanish bank, used blockchain technology as
a substitute for traditional trade documents (such as B/Ls) to reduce transaction time from 10 days
to less than three hours [49]. This project consisted of the exportation of frozen tuna from Mexico
and the L/C payment issued by BBVA. The blockchain solution provider, Wave, utilized digitized
documentation and electronic signatures to replace traditional paper-based documents. A special
feature was the electronic presentation of documents during international transactions (Figure 4).
Sustainability 2020, 12, x FOR PEER REVIEW 17
Figure 4.
Figure 4. BBVA pilot program
BBVA pilot program for
for improving
improving international
international trade.
trade.
4. Results
This digitization technique may apply to B/Ls in L/C payment processes. Moreover, smart
contracts
This were programmed
section summarizesintheaccordance with of
characteristics contractual
the selectedagreements
cases andthat specified
illustrates thecommercial
rationale of
terms and conditional statements of the L/C. Blockchain-based L/C and B/L systems
the blockchain paradigm shift. We use the underlying rationale of each project to elaborate also facilitate
on the
financing
drive for execution through the
an L/C paradigm autonomous
shift. Moreover,features of smart
we examine thecontracts. For shipping
role of blockchain L/Ccompanies, this
in achieving
project also provided better provenance
various objectives of trade finance. tracking and visibility for handovers of goods and documents.
4. Results
4.1. Findings from Cases
This section summarizes the characteristics of the selected cases and illustrates the rationale of
In general, trade finance is highly dependent on centralized operating mechanisms. Banks, as
the blockchain paradigm shift. We use the underlying rationale of each project to elaborate on the
major trust providers, function as the processor of L/C transactions. In a blockchain platform, banks
drive for an L/C paradigm shift. Moreover, we examine the role of blockchain L/C in achieving various
still play the critical role of the dominator. Trade finance is conducted and audited via banks
objectives of trade finance.
primarily for security and trust concerns. Among the various types of blockchain, a consortium chain
is favored in the context of trade finance. Selected cases present a consortium blockchain as the best
platform type to enhance the governance of financial transactions. In addition, trade finance using
L/C deals with considerable manual processing and paperwork. Hence, all selected cases share the
common need of devising a blockchain-based mechanism in order to process trade-related
documents. In particular, the digitization of L/C and B/L, to some extent, represents the need for
logging key contract terms on the blockchain. In this sense, participating parties may check for or be
notified regarding changes in status across trade processes.
Smart contracts allow the execution of contract terms or agreements as programmable enablers.Sustainability 2020, 12, 188 10 of 16
4.1. Findings from Cases
In general, trade finance is highly dependent on centralized operating mechanisms. Banks, as
major trust providers, function as the processor of L/C transactions. In a blockchain platform, banks
still play the critical role of the dominator. Trade finance is conducted and audited via banks primarily
for security and trust concerns. Among the various types of blockchain, a consortium chain is favored
in the context of trade finance. Selected cases present a consortium blockchain as the best platform type
to enhance the governance of financial transactions. In addition, trade finance using L/C deals with
considerable manual processing and paperwork. Hence, all selected cases share the common need of
devising a blockchain-based mechanism in order to process trade-related documents. In particular, the
digitization of L/C and B/L, to some extent, represents the need for logging key contract terms on the
blockchain. In this sense, participating parties may check for or be notified regarding changes in status
across trade processes.
Smart contracts allow the execution of contract terms or agreements as programmable enablers.
Event-driven mechanisms formulate the interaction of smart contracts and allow business process
automation, along with traceability notification. L/C payments may be conducted via preset transaction
conditions while related parties confirm the validation and verification of transactions. For practical
demands, smart contracts may invoke one another via functional calls as what is done in the context
of computer programming language. Key parameters may be set on demand, such as trade-related
numbers, dates, or shipment conditions. Smart contracts, in various cases, can help with administrative
details and enhance the streamlined execution or transmission of trade information.
It is noted that blockchain-based platforms improve dependability and accountability for trade
actors. For example, the cases of Ornua and Mizuho/Marubeni indicated that trade participants were
forced to follow the rules presented in trade documents and be held responsible for their actions.
The transaction logs generated by participant interactions are recorded to the shared ledger according
to critical contractual terms. Transactional data that are checked and verified by the collaborative
network avert attempts at tampering. The blockchain can also help in the transfer and identification of
digital assets, which facilitates trade finance processing during numerous handovers. Digitized assets
may be validated for authenticity by encrypted keys and measures such as digital signatures. From the
cases of Maersk/IBM and HSBC/Cargill, blockchain potential is found in the cost reduction of exchange
of trade documentation. This capability demonstrates the immutable and auditable attributes that
the blockchain mechanism provides in trade financing activities. Efforts on processing paper-based
procedures are reduced through the shared transaction ledger and thereby improve the timeliness and
efficiency of trade workflows. In addition, the case of Maersk/IBM illustrates the potential of blockchain
technology incorporation. The blockchain can serve as a distributed database that serves to address
major security requirements of the IoT to improve device manipulation and data management [50].
In the case of BBVA, smart contracts automatically enabled the execution of contract terms that were
followed by business logic.
4.2. Driving Factors of the Paradigm Shift
Blockchain L/C cases illustrate the potential of the L/C paradigm shift. In general, the blockchain
L/C application may streamline trade-related activities and annoying handovers that frequently
happened in traditional L/C finance. Particularly, the reduction of paper-based processing may help
participants collaboratively build up network relationships to attain a more sustainable business
environment [3]. However, critical impact factors such as system transparency, traceability, cost
reduction, and user experience are possible areas for further investigation. Researchers have devoted
effort to the exploration of blockchain adoption behaviors in the logistics and supply chain fields, in
terms of technology adoption and network theories [7]. The most important drivers for blockchain
adoption reported by researchers are cost reduction, the establishment of trust-free mechanisms,
increased efficiency, enhanced transparency, and accountability [28]. Moreover, it is obvious that
the blockchain has technical limitations at the current stage. Typical issues such as block size,Sustainability 2020, 12, 188 11 of 16
transaction throughput, privacy concerns, and scalability are adversely affecting corporate willingness
for business investment. To better leverage the effect of blockchain technology, multiple participation
parties, including customs agents and governmental units, may be necessary to facilitate an overall
network effect.
In addition, the digitization level of traditional documents may influence the effectiveness of
using a blockchain solution. Challenges, such as scalability, platform standard, legal effect, distributed
governance, and social impact, have a crucial influence on the future adoption and development of
blockchain-based trade finance.
5. Discussion
5.1. Impact of Blockchain L/C Adoption and Research Implications
Table 2 summarizes the potential influence of blockchain L/C on improving trade finance.
We consider five major dimensions related to the adoption of blockchain L/C processes and illustrate
their connection to various cases.
Table 2. Impact dimension of the use of blockchain in trade finance and L/C payment.
Mechanism or Applied Scenario
Impact Dimension Blockchain’s Role
[Selected Case]
Supporting auditable records of transactions by its
Shared transaction records [A-E]
distributed shared ledger
Collaboratively verifying critical transactions or property
Consensus mechanism [A-E]
transfer by its participating nodes using its shared database
Transparency
Physical property digitization and establishment of Identity hashing with
immutable transactions on the common shared ledger assets/documents [A-E]
Reducing fraud and counterfeit of goods/document across Digital signature and validation
transaction journey [A-E]
Looking up records via transaction
Providing participants with access to transaction records
nodes [A-E]
Enabling broadcast of verified and
Consensus mechanism [A-E]
Information transmission time-stamped transactions
Automatic execution of Blockchain’s trade activities Event-driven mechanism [A-E]
Monitoring the change of state on
Visualization of physical flow of goods/documents.
Traceability logistics/documental flow [A-E]
Near real-time notifications Event-driven mechanism [A-E]
Hashing digital signature of a
Dis-intermediation Cash settlement and validity check of trade documents
digital trade document [A-E]
Reducing the presentation of
Streamlining administrative processes
paper-based documents [A-E]
Cost
Shortening the duration of waiting and lowering down Removal or mitigation of manual
transaction fees processing [A-E]
Incorporation of IoT Facilitating storage of tracking records Distributed database [C]
The blockchain provides improvements in various aspects of trade finance. In this study, we
focused on six major dimensions of the blockchain, namely, transparency, information transmission,
traceability, disintermediation, cost, and the incorporation of IoT for the analysis of the impact of
blockchain-based trade finance, particularly in supporting an L/C payment process.
5.1.1. Transparency
In a blockchain-based trading system, transaction records are immutably replicated and kept by
participating nodes. Broadcast by the participating nodes on the blockchain, transaction records may
be checked, and blockchain data can be pervasively accessed to enhance transparency and auditability.
This obviates, or at least alleviates, the need for certified trusted parties and a consensus mechanism,
which reduces the opportunity for fraud and malicious activity. In addition, the combination of
digitized property/assets and the blockchain system enables users to independently validate identitySustainability 2020, 12, 188 12 of 16
and creates a traceable audit for authenticity [51]. Thus, the transfer of ownership and the validation
of identity are more transparent and auditable during transactions. Participating parties, therefore,
benefit from a reduction in the cost of such confirmation.
5.1.2. Information Transmission
In these cases, the blockchain enables trading parties (carriers, exporters, importers, and banks)
to share common distributed ledgers for trade finance. Through the use of smart contracts, trade
documents may be digitized to facilitate the automatic execution of trade processes via preset codes.
Moreover, event-driven mechanisms facilitate the flow of critical information among parties. In this
sense, trade friction and painful handovers of goods/documents could be greatly reduced to reach
near real-time response of workflow status. For example, IBM and Maersk leveraged a blockchain L/C
to reduce document transmission time from days to less than a few hours. Repeated confirmation
or manual checks, needed in typical trade logistics/payment contexts, may be eliminated from trade
processes by introducing smart contract event mechanisms and using related IoT technology.
5.1.3. Traceability
Logistics traceability has been subjected to shipment handovers, thus hindering the pursuit of
better trade performance. Traders often wait for a notification to activate certain business activities, for
example, making payment upon the arrival of goods or presentation of documents. Smart contracts
deployed on the blockchain provide a parallel function by enabling the automatic notification of status
changes [52]. Similar concepts also apply to the tracking of trade documents. The blockchain allows
trade document digitization and the attachment of such documents through the use of cryptographic
algorithms that help in the realization of integrity and the prevention of counterfeiting.
5.1.4. Disintermediation
In trade finance, many traditional intermediaries hinder the speed of transactions. The blockchain
facilitates the processing of cash settlements and saves companies time and money. In addition,
combined with the unique features of the blockchain, a validity check of trade documents may be
conducted without the need for certified and trusted third parties. This refers to the fact that diverse
trading parties could be connected to a single transactional network without intermediaries providing
trust. Thus, trade workflows could also be expedited and better performance achieved through the use
of blockchain-related technologies.
5.1.5. Cost
Cost is one of the major concerns of promoting L/C finance processes. Companies have spent
considerable amounts on minimizing trade-related administrative details in cross-border transactions.
Handovers across shipping routes have lowered the efficiency of process flow and made business
less competitive under other payment options, such as inter-firm trade credit [12]. The blockchain
may streamline trade processes and demand less when compared with traditional payment systems.
The main reason is the reduction in the cost of centralized service providers. The elimination of
documentation accounts for significant savings in the context of global trade. The blockchain, with its
immutable shared ledger, ensures significant cost reductions. Manual paper-based procedures are
also greatly reduced, and the time and workforce needed for document processing are eliminated.
Maersk’s case provided practitioners with confidence in terms of the manner in which digitized assets
and documents are transferred across borders. From the perspective of transaction cost economics,
blockchain applications also leverage their power on reducing related costs such as those related to
searching, bargaining, and policing.Sustainability 2020, 12, 188 13 of 16
5.1.6. Incorporation of IoT
Researchers have asserted the practical importance of emerging IoT in blockchain applications.
The trade journey involves a great deal of information on logistics status, such as the location of
goods, ownership of assets, etc. IoT enables the communication of properties. However, the lack of
trust hinders information sharing among assets and devices of different parties. The blockchain, as
an immutable ledger, could fill the gap of trust issues and facilitate the operation of the IoT, such
as applications for machine-to-machine transactions, management of progress, and source tracking.
Prior research devoted effort to functions, such as tracking provenance and logistics states, shipping
environments, and the incorporation of the blockchain and IoT [50]. These trials are of value and may
enrich the whole IoT ecosystem with the improved security and interoperability they bring in their
wake. Trade participants also benefit from the enhancement of accurate tracking with the integration
of these two technologies.
5.2. Potential to Transform Trade Finance Practices
Trade finance has placed growing interest in blockchain use cases. A number of pilot projects
are looking forward to benefiting from the distributed ledger network. The blockchain may provide
radical opportunities for supply chain transformation by virtue of its immutable, tamper-proof
features. Among various applications, the blockchain, and its affiliated smart contract technology,
offers better transparency, traceability, and process automation. Various parties in the international
trade ecosystem conduct business activities under conditions of uncertainty and lack of trust in
counterparties. A blockchain-based platform extends its performance by enlarging network effects,
i.e., the more the participants the greater the collaborative effect. Network effects are essential for
considering the pursuit of blockchain-based solutions.
From the foregoing discussion on these case studies, a potential paradigm shift in blockchain
L/C is expected to occur through a complete integration of blockchain B/L, invoicing procedure, and
the IoT. The integration of related blockchain applications may enable the formulation of complete
collaboration among trade parties. It is also suggested that such efforts be devoted to the reduction
of paperwork processing in order to improve overall trade finance performance. In addition, the
adoption of blockchain L/Cs may also facilitate distributed governance and process automation in
global trade finance.
Managerially, the similarities of all cases illustrate the power of the distributed shared ledger, which
aims to transform the way in which businesses conduct payment and asset transmission. In addition,
the collaborative network plays a key role. The trade ecosystem may upgrade to a more efficient level
as the multiple participant context is preferred for the operation of the blockchain network.
6. Conclusions
This paper explored the feasibility of blockchain technology in trade finance and the manner
in which it may achieve the pursuit of trade finance facilitation from the perspective of L/C.
Multi-case studies of L/C pilot projects are provided as early evidence that international trade
and financial institutions have been dedicating effort to related fields. We illuminated the rationale
propelling corporate adoption from selected cases and elaborated on the comparative advantages
of blockchain-based L/C processes. The blockchain has the potential to reform business operations
through its immutability, transparency, and interoperability. We may expect its capability to reduce
paper-based manipulation, to improve trust among trade stakeholders, and to ensure the development
of sustainable business environments as well as sustainable finance. The innovative working paradigm
of trade finance may disrupt financing practices by eliminating the friction caused by information
transmission/confirmation in the achievement of business-related environmental sustainability.
This work focused on the blockchain L/C pilot projects at an early stage, while more applications
in trade finance need to be explored to extend the effort of the ecosystem. Blockchain technologySustainability 2020, 12, 188 14 of 16
may have innovative potential in process simplification or disintermediation. However, technical
limitations [53] and legal concerns [54] could hinder its further adoption in practice. Typical challenges
include scalability, throughput, and technical standards. In addition, case studies on potential pilot
studies may bring positive, promising opportunities even as collaborative adoption from trade finance
stakeholders may further leverage the potential of the blockchain.
This study briefly illustrated common characteristics of selected cases, whereas the evaluation
of individual case performance was left for future investigations. More academic or quantitative
efforts exploring the fundamentals of blockchain adoption may provide a more comprehensive
perspective. Future research should emphasize security concerns, as well as the incorporation of
IoTs, to supplement the need for process automation along with the pursuit of transparency and
accountability. In conclusion, it is suggested that research efforts be devoted to subjects related to
customs and port administration, as the full paradigm shift may be achieved through collaborative
networking among multiple international trade stakeholders.
Author Contributions: While all authors contributed about equally to the research presented in this paper and to
the preparation of the manuscripts, the first author (S.E.C.) arranged for the project resources and acted as the
principal investigator of the overall project, and the third author (Y.C.) coordinated all paper submission and
revision efforts. All authors have read and agreed to the published version of the manuscript.
Funding: This research was supported by the Ministry of Science and Technology, Taiwan, under contract
number MOST-106-2221-E-005-053-MY3.
Conflicts of Interest: The authors declare no conflict of interest.
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